Relatively Bearish: The New Bullish

The marketplace is comprised of a multitude of opinions that are never in sync. If they were, little trading would occur as prices would reflect the level of true value as deemed by all parties. Why trade if you don't think you are going to get the best of it?

Today, there are many reasons be bullish on the American economy. Among them are the following.

Consumer activity: Retail sales rose 0.4 percent in April after a 2.1 percent March increase and has risen seven of the last nine months with the remaining two flat. The Consumer Confidence Index has rebounded from a low of 25.3 in early 2009 to 57.9 today.

Employment: While certainly not setting the world on fire, payrolls have decidedly turned positive, growing by 520,000 jobs in the last two months. Even the recent rise in the unemployment rate from 9.7 percent to 9.9 percent is technically the result of previously discouraged workers looking to reenter the workforce.

Manufacturing: The regional manufacturing surveys have all bottomed and look to be heading up, while industrial production activity rose by 0.8 percent in April after a 0.2 percent in March. Durable goods orders measured on an annual basis turned positive three months ago and the ISM New Orders Index has nearly returned to the levels we saw from 2003 to 2006.

Trade: The downward trend in our trade deficit has steadily returned with both imports and exports increasing fairly steadily since last June. Typically, the trade deficit narrows in recession and widens in recovery as consumer activity picks up.

Despite these positive indicators, I just can't get myself to take a medium-term positive view for the economy as a whole. You know, the kind that projects rate increases on the near horizon along with solid and sustained employment growth. Happy consumers and happy savers alike going about their day making money, saving money and spending money.

In my opinion, there remains a significant barrier to such an atmosphere. And that is (no surprise here), the housing sector.

Today, our economy is two-thirds consumption and consumers are worried about two things: their jobs and their wealth. As long as these worries exist at the level they are today, a sustained consumer-led recovery will not prevail even if credit availability increases.

The primary risk to my interest rate outlook is that Bernanke becomes too concerned about inflation given all the stimulus slushing around and decides to move rates toward a more "normal" level. This would be a mistake and would send the job market reeling downward once again as added business costs (in the form of higher interest rates) act as a tax on operations — a tax that consumers are in no shape to pay.

Instead, I see a continuation of our slow growth out of the current low base of activity as market participants begin to accept the new realities of our global economy. I've taken to calling this "embracing the horror."

Though I am constructively positive on the economy, it seems too many are unrealistically bullish. As a market analyst, finding myself at odds with the consensus view is a comfortable place to be. In fact, it's a requirement if I am going to add value. Today, I am in this comfortable position and see no reason to revert to the market consensus.

In short, I gotta right to sing the blues!

Key Developments

In March, the trade deficit for goods and services increased to $40.4 billion from $39.4 billion, up from its low of $25.8 billion in May 2009. Both exports and imports increased by approximately 3.2 percent. More than 100 percent of March's increase came in the petroleum sector due to both increases in quantity and price.

Jobless claims for the week ended May 8 decreased by 4,000 to 444,000, marking the fourth consecutive weekly decline. Continuing claims for the week ended May 1 edged up by 12,000 to 4.6 million, but remain far below their peak of 6.5 million in the summer of 2009.

Retail sales performed largely as expected in April rising 0.4 percent with or without including the volatile auto sector. The rebound in consumer activity remains in place potentially helping to boost overall economic activity into the second quarter.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.